Mortgage  Question?
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Pay Down Credit Card or Car Loan Before Apply Mortgage?

Should you pay down your credit card or car loan before you apply for a mortgage? I only have four more payments left on my car loan.

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

Based on the information you provided, for multiple reasons I recommend that you pay down your credit card debt. First, credit card debt usually carries a much higher interest rate than a car loan and it typically makes more financial sense to pay off higher interest rate debt before lower interest rate debt. Second, as you referenced in your question, the monthly payments on an amortizing loan (such as a car loan) with less than six months remaining in the loan term are typically not included in your debt-to-income ratio calculation when you apply for a mortgage. Finally, reducing your credit card utilization rate while keeping your account open can have a positive impact on your credit score, which is beneficial when you apply for a mortgage. So taking all of these factors into consideration, paying down your credit card debt makes financial sense and should improve your ability to qualify for a mortgage. Please note that if you pay off your credit card bill completely, some lenders include an estimated monthly payment for revolving debt accounts (such as a credit card) in your debt-to-income ratio even though the account balance is zero.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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